Don't say that word too loudly - Price

There are many words that society has placed taboos
around. Each society has words that are
unacceptable for whatever reason, that people are uncomfortable in using in
public.

In business there is one word that makes most business
owners so uncomfortable they don't often feel like discussing it even when
pushed. And it's not a four letter one
either. It is...... PRICE. More specifically what their prices are and
how they set them.

So
what is so difficult about your price?

You must remember that the price is where all of your
marketing investment meets the moment of truth between your business (the brand/product/service)
and the customer, the results of which you measure in your financial
statements.

Yet four different factors come into play.

The first factor is that companies habitually charge less than they could for new
offerings or indeed for most offerings.
It's a terrible habit.

The second factor to be contended with is that Marketing
identifies Price as one of the four key 'Ps" in the marketing mix but
there is little linking of the marketing
aspects of price to the financial side of the business in terms of decision
making.

If you have a poor result for the year, your accountant is
just as likely to say "Raise your prices?' without any consideration of
the impact of this on your position in the marketplace.

There is a third factor to take into consideration - that
of fear, your fear, fear of losing your
customers if you raise your prices. Is
this you? It's an affliction that
affects most small businesses. And all
the time costs are imperceptibly rising.

Finally how much
time do you spend considering your pricing strategy and how you set your
prices? Most small business owners and
managers spend less time considering their pricing strategy and how they set
prices than they do considering whether they should sponsor their child's
sporting team. Yet it's a complex
business.

Why
is effective pricing strategy so complex?

The complexity comes
from the process, or lack of process, that small business owners and
managers use in determining their price.
Pricing decision making in the marketing context is often done with a
great deal of uncertainty and dismay, if it is done consciously at all. For most businesses, pricing is a profit leaking
paradox. Hand on your heart, can you say
whether you set your prices:

According
to a set formula or plan, with a proper understanding of your costs;

Simply price
to cover your costs (do you really know them)? or

So you
won't be seen as too different in your market place.

Why is it that some businesses don't want to be seen as
different from other businesses in their market place? In fact, if you are not able to differentiate
yourself from your competitors, then you had better have very, very low prices,
because that is all the customer has to base their decision upon. That will be the only factor they will have
to determine value.

In fact when you set your prices do you:

test
the results, or test different price levels

do so
to maximise profit for the company or to maximise value for your customers?

What
is the underlying problem?

Price is actually
not the problem. Instead it is the lack
of understanding of different pricing strategies that confuses owners and
managers. And the lack of understanding
leads to ineffective pricing strategies, or the wrong pricing strategies. And poor management of price diminishes your
profitability, and eventually puts your business at risk.

Let's take an example.

Discounting is one
pricing strategy that many small business owners follow when they want to
boost sales. But think about it. Will slashing your price, without slashing
your costs, really do much for your business?

As a colleague, Mark Silver puts it, discounting assumes
that:

1. The difference in price between your 'regular' price
and the discounted price is what is stopping your customer from buying (i.e.
your product doesn't represent value);

2. It's worth it to acquire a customer whose most
important consideration is how cheap
your offer is.

If the price is the
problem, you've done a not so-good job of demonstrating the value you
provide. Competing on price alone means
that you see your product or service essentially as a commodity. If you see it as such, then customers will
certainly treat it as a commodity. And
then you had better have very low prices.

Discounting may boost sales, at least for a short while, but
it certainly won't boost your profits, or the long term sustainability of your
business. Reducing prices is usually an
unsound long-term strategy that makes it more difficult to be profitable.

Price is a
positioner. What is meant by
that? Market position is the perception
that customers have of your brand/product/service in the market place. Now you can let customers decide for
themselves, or you can use the ‘marketing mix' of product, price, promotion and
place to create your position.

In a recent case study a US College was losing
enrolments. Part of the problem was that
their prices were lower than other similar colleges, leading parents to think
that the tuition provided was not of the same quality.

Increasing their prices significantly, along with some
improvements in packaging, lead to a significant increase in enrolments. The prices changed how the college was
perceived.

And that is the issue.
People often perceive low prices with low quality. For small businesses, which by their very
nature don't have large volume sales, is it better to seek sales with a higher
perceived quality and value. It all
comes down to the pricing strategy you have decided to follow.

Or as legendary marketer Zig Zeglar put it aptly "I decided long ago I would rather
explain price once than apologize for quality forever."

Whichever
strategy you follow there are three key principles to always keep in mind.

1.
The first
pricing principle is not to undervalue/underprice your products or
services. Remember you are in business
to make a profit to stay in business and make at least an acceptable living.

2. The second pricing principle is that
price is not only the amount on the ticket but also includes other influences
on price such as discounts, allowances, and credit terms.

3. The third pricing principle is to set
prices in order to maximise profits, not to maximise sales.

The key to profit is not just the numbers, sales,
and frequency. At some point you need to
look at fixed and variable costs vs. income. If costs exceed income on every unit sold, you
will never see profit no matter how many you sell. On the other hand, you can make a decent
living on low volume if you price your service right and provide high value.

If you consistently follow these principles pricing need
not be a profit leaking paradox. And it
will be a word you can discuss in public.

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